Managing Your eCommerce Business

Click here to view the webinar video “Managing Your eCommerce Business”.

Most entrepreneurs still think of their e-commerce site as a shop selling goods, like the old days, when they should be thinking of them as marketing machines. In this video I give you lots to think about.

 

Listening and Satisfying Expectations Improves Leadership

I love to engage with others. It challenges me to think differently about myself and the world. I am open to the difference. I find it enriching. However, I have to say my experience is that most people do not share this same passion. They will only go so far before the comparison becomes too painful, and they shut down. Being the dope that I am I often miss these telltale signs and continue trying to engage with them only to find myself alone and frustrated. Sometimes very frustrated. For me, there is nothing worse than not being heard.

On a personal level not being heard brings up feelings of being disregarded, unimportant, diminished in some way. I know that’s only in my head so who cares. The real and lasting impact is the relationship that was established is now broken. No matter the relationship it no longer exists when one of the two turns away from the other.

I’ve experienced this rupture many times over my lifetime; on both a personal and professional level. Some experiences were unpleasant. Others were downright painful.

Building and maintaining relationships is so vital to our sense of self and the communities we inhabit making each of them so very precious.

Sure relationships change over time and we must accommodate for those changes in ourselves and others but maintaining them is fundamental to human existence. Herein lies the challenge.

In my view, the best way to deal with the evolution in relationships is to be clear about and manage expectations. You put your expectations out into the world. And, the rest of the world sends their own back to you. It then becomes a dance of sorts to manage those expectations. When our expectations are unmet that we become introspective, questioning them. In the opposite direction, when the expectations of those around us are unmet we pull out those qualities of kindness, attentiveness, understanding, compassion, forgiveness, and the like, which make us human.

As you can see, expectations are key to building and maintaining positive relationships. You have to listen to the other party and be heard by the them in order to hear and internalize each other’s expectations. Listening to and hearing expectations are the basis for strong relationships.

As a leadership coach, and former business executive, I have been repeating this mantra for decades.

Yes, business is transactional but clients want to have build a trusting relationship with the business. Heck, everyone in the business’s community wants to have a trusting relationship with your business: employees, bankers, vendors, charities, governments,… too. You have to create and manage expectations.

This is the cornerstone of my vision of business.

Easier said than done.

This brings me to four real life experiences I’ve had this year with well-known business who failed miserably in creating and managing expectations, as a result of which broke their relationship with me, and possibly a mutual client.

Bank of America Merrill Lynch

At the end of 2016, I walked into a Bank of America Merrill Lynch office to discuss the financing needs of a couple of clients we have in common. After exposing the first client’s challenges we quickly understood there wasn’t much the bank could do there. Fair enough. We moved on to the second client. After hearing their needs, the representative said they could offer me a product. Great!

Long story short, this representative brought in three colleagues from Wealth Management with whom I met and who confirmed to me this product was the solution and wanted to work with me to get it to our mutual client. I discussed the solution with her and decided to move forward.

I worked with the Wealth Management team for weeks setting everything up and negotiating terms and condition. Set up a meeting for the client to come in and sign the papers only to have the whole thing cancelled the day before the signing. No explanation was given.

Now here’s the problem. I didn’t come into the branch asking for a product I was already familiar with, they offered it to me. To my client, I should say.They created an expectation, not I. At the first meeting the product was offered and the expectation created. Then again, at the second meeting with the larger group of bank representatives. They confirmed this expectation through the numerous weeks of work we put into providing this solution to our mutual customer. They worked toward building a stronger relationship with their customer, and myself and then broke it by shutting down. Failure number one.

Not being one to let things go, I spoke with their boss who put another team on it. Again, assurances were made, expectations created, work put in, and then a failure to execute. That’s twice.

Still needing to satisfy my client’s requirements I pushed ahead for a third time with still another team with the same result. A third failure.

Not a little frustrated and angry, I decided it was important for the bank’s President to know what was going on at street level in the bank he was running so I asked my customer representative for the contact information. I wrote but never received a reply. For the forth time, an expectation was created and not satisfied.

Needless to say, our mutual client immediately entertained leaving Bank of America Merrill Lynch for their repeated failures to deliver on the expectations they created and the relationship she envisaged having with them. Six months later, she is still thinking about leaving the bank.

Thrifty Rent-a-car

A few months ago, I rented a car for a few days while my nieces visited with me. At the time of the rental, I decided to include a couple of extra days after they left to do some errands I had been putting off. Nothing strange or unusual, I thought.

My nieces and I had a wonderful time together and got all the errands done before they left so I decided to return the car early. Big mistake!

You see, Thrifty did not simply apply the same rate and knock off a couple of days from my bill they recalculated the rental as if I were renting that day. The price for less rental days multiples by three the original rental! What an idiot I was for thinking I would pay less than originally thought by returning the car early. Naturally, in the face of a bill that ballooned to three times the price I kept the car for the remainder of the rental, parked, doing nothing.

Now, I don’t know about you but I don’t expect to use a rental for less time and pay three times the price originally contracted.

Although Thrifty is conveniently nearby, I doubt I will ever rent from them again.

FedEx

A New York law firm needed to send me, in southern Florida, papers for the sale of a family owned business. They chose FedEx just before the weather service announced hurricane Irma would hit. Needing to leave the area, I called FedEx asking them interrupt delivery and return the package to the sender as no one would be available to receive it. The customer service representative sent a message to the depot (or whatever they call it) telling them to not deliver the package and return to sender, and confirmed as much to me over the phone and recorded everything in the CRM system.

Like all good plans, something went awry. The parcel was delivered anyway, the hurricane hit southern Florida, and the it was lost. All investigations made by FedEx concluded it is lost. So I filed a claim to recover the cost to reproducing the lost papers contained in the parcel.

FedEx customer service sent me the claim form, I filed it, and not heard anything since. It has been almost a month of silence. I sent an email, as per the form, to inquire about the status of the claim and got no reply.

So what’s wrong here. First, the expectation was set that the parcel would be intercepted and returned to the sender. Failed. Second, the expectation was I could be made whole again by filing a claim. So far as I know, fail. Third, I could find out the status of my claim by sending an email to the email address. Fail, again.

UPS

After hurricane Irma, when it was safe to return to southern Florida, I sent four parcels of personal belongings down from NY. Having had such a poor experience with FedEx, I decided to try UPS. Big mistake!

At first, I went to a local UPS Store. The one and only person working in the store gave me a price quote but told me because of the hurricane UPS had suspended service to Florida. I could leave the boxes with them but they didn’t know when I get them.

So, I called UPS to verify this information and told it was wrong. UPS did indeed have service to Florida and they gave me a price quote around $40-$50 less than the store. No big deal. The store must have a markup. However, giving me the wrong information lost them the sale altogether.

While on the phone, I’d given the customer representative all the information necessary for the price quote so I asked him to process the order. To my surprise, he could not. WTF! All the information was already in the computer?! He told me I had to do it myself online. Not happy, I nonetheless followed his instructions.

Once online, I started to fill in the form but was blocked after the second parcel. Not finding any solution on my own, I called customer service again only to be told I had to create an account for more than two parcels. So I deleted the information, created an account, and started again. This was the now the fourth time in less than two hours I was treating the same information! Why didn’t the first customer representative tell me I needed to create an account?

I entered the information, insured the packages, and checked the box for a pick up. On the confirmation page, after payment, I received further instructions about my shipment including having to request the pick up. But, I’d just requested the pick up!?! Now I was confused again. A third call to customer service told me I hadn’t requested the pick up so I had to start that process and pay more money. Why the pick up was not included in the workflow the first time I’ll never know. Anyway, I scheduled the pick up, paid, and then fought with the form two or three times to correct the information it wasn’t saving properly. I waited for the next few hours until the pick up. When the UPS guy finally came he was very unhappy with his work but at least the boxes were on their way.

A few days later, back in sunny Florida, the boxes arrived. Some of the items in one box were damaged so I filed a claim. UPS’s claim department is much faster than FedEx’s. Faster at refusing the claim, I should say.

Although I provided them with all the documentation they requested they refused the claim on the basis that the package did not conform with ISTA 3A testing norms. I contested this point by indicating that the box was larger than those for which ISTA 3A was appropriate so they should honor the claim. They didn’t want to take this detail into consideration. One would think I purchased the insurance to protect UPS from me instead of protecting my belongings from accidents. Crazy!

Anyway, after speaking with two people in their claims department, it became clear that UPS’s color is brown because it like talking with a brick wall. They don’t want to hear anything the customer has to say.

As you can see, UPS did a tremendously poor job at the relationship with its customer. No wonder they’ve lost so much business and now have to provide line haul services for the post office. Next time, I’ll go to the post office and at least get a level of service in line with expectations.

Beyond my own concerns with relationships, these three examples illustrate two significant trends in our society:

  1. The public’s lack of trust in business and government institutions.
  2. How innovative companies are leveraging listening as a way of building lasting relationships with their customers.

As these four cases demonstrate, the relationship between the companies and their consumer is rather one sided. These businesses are more interested in satisfying their own needs before those of their customers. They abuse their dominant position in the relationship for their own gains. Likewise, their dominant market positions allow them to corner a market segment thereby limiting the market alternatives available for consumers to choose from. These dominant positions allow these economic players to communicate expectations in order to get the business but then to not live up to those expectations without any repercussions.

This bait and switch in business also exists in government where, for decades, we have seen politicians elected to office on the basis of political platforms that are hardly, if ever, executed once in office. It is no wonder we live in such a polarized economic and political world today.

It seems, all too often, we are being told what we want to hear in order to start a relationship – enter the transaction – but end up with dominant players exacting so much from us than we would like to permit. It is no surprise the level of trust we have in businesses and governments is so low.

On the other hand, if you look at a number of successful companies you see how giving the consumer the opportunity to be heard and considered sits at their center. Regardless of whether these companies are truly trustworthy, or not, they deliver on the expectations created and allow customers – often their whole community – to participate in shaping their future.

Using the most powerful communication tool we have to date, the Internet, AirBnB hosts and guests provide feedback to each other; car sharing companies – like, Uber, Lyft, and Didi – allow drivers and passengers to hear each other; and, Amazon sellers, hotel guests, and many more provide for at least one way listening. Social networks are prime vehicles for listening and possibly engaging.

Although still marginal, blockchain technology respond to this same human need for trusting relationships from just the opposite side of the coin, by creating a system in which expectations are met in the total absence of a trusting relationship. The cyberpunks who started the dabbling in blockchain, cryptocurrencies, and smart contracts did it starting from a worldview of distrust in institutions and the belief that self-regulating distributed system could remove trust from the relationship.

Although I have great respect for and an certain intellectual curiosity for this new technology, I am still old fashion enough to think the warmth of another human being is preferential to the heat given off by a computer. So I ask you when thinking about leading your business to look at your community (customers, employees, vendors, bankers, charities, governments,…) as welcome members with whom you have a mutual interest instead of as an adversary to be dominated at all cost. Likewise, when thinking about leading yourself – always a prerequisite to leading others – you should consider your community in the same way.

We need more listening, more hearing, more consideration, more authenticity, and more explicit expectations to have better trusting relationships; not the less which seems to be the norm today.

What’s Wrong With My Business

So many people get in touch with me to find out what is wrong their business, why it won’t grow, that I decided to share my answer with as large an audience as possible by posting it online. For the lazy readers amongst you, the quick answer is you have spent so much time online reading, listening, and viewing process driven solutions to your business problems that you haven’t paid enough attention to the fundamentals: the resource your business owns and/or controls. Business is, after all, a resource allocation problem. So the best question you can ask yourself is, “What is my resource?”

For those willing to work through my prose, here is the long answer.

Since businesses use many resources, you might be asking yourself which one I am referring to. To be clear, there is one resource without which any of the other resources are of much use. Also, the resource I have in mind is used in all the products/services your company sells. This resource is so important I call it the Key Component.

A Key Component can be just about anything. It depends on your business. Personally, I have worked with small businesses where the owner is the Key Component – a designer, artist, contractor/builder, architect, health care professional, lawyer, a chef,… – while in others it may be an employee – one of the above. Likewise, I’ve worked with more complex businesses where the Key Component is some form of property like a machine, trademark, land, patent, copyright, process, license, and so on. In even more sophisticated businesses we find what are commonly referred to as derivative products/services that will be based on an underlying property, like a insurance contract, financial derivatives and data.

To be pragmatic about it, most countries have spent centuries developing legal systems that attribute some form of legal status to the Key Component making legal recognition the common element. After all ownership is recognized by the law through titles, deeds, and what not, while control is affected through ownership it is also determined through licensing, renting, leasing, and such.

Legal recognition of the resource that makes everything else in your business possible makes perfect sense when viewed from a competitive standpoint. The law is your first line of defense against competitors. In other words, another economic actor cannot compete against your company using your own Key Component. They must come up with their own.

Let’s look at a base case. The most basic resource which can be considered a Key Component is land. In most societies, the legal system – or some other system – recognizes title to the owner allowing the owner to then derive the benefits that land produces for them. Depending on the land’s attributes it can be used for many different ways and provide many different benefits, such as: farming, grazing, building, mining, transportation, and so on. However, the owner may not want to exploit the land directly in which case it can be made available to another party by way of a rental agreement or lease, or in some other contractual form giving this party effective control.

Of course there are other Key Components. This website is built with software written by someone for which they received a copyright. I get to use it to write this article but I don’t own or control the software allowing the copyright owner to modify it as they see fit. However, this content remains mine by way of my own copyright which means the website or you can’t use it without my permission. Similarly, the website is trademarked and the owner of the trademark keeps all the rights to it. The server on which the software runs is also a Key Component for the company owning it.

Furthermore, legal recognition makes the Key Component transferable. It can be sold outright. It can be used as capital when transferred to a legal entity. A lender can use it as collateral for a loan.

Conversely, the law can limit a Key Component. Let’s take a person working as a chef in a successful restaurant as an example. The restaurant owner will exercise control over the chef through an employment contract. But this may not be enough for the chef. The chef may realize how important they are to the restaurant’s success – the Key Component – that they may seek to negotiate an ownership interest thereby aligning both parties interests in the venture and also further limiting the chef’s courses of action outside of the restaurant. An owner may seek even further control over the chef even after they leave the company by obliging the chef to sign a non-compete agreement covering a certain number of months after leaving, all in an effort to limit competition.

Here is another example. Think of airline. What is their Key Component? Can you guess?

Most people say “airplanes” but this is not correct. An airline’s Key Component is its takeoff/landing slots at the airports it serves. It is for this reason that when there is a merger between airline companies the anti-trust authorities or courts will examine the proposed merger on the basis of how many slots the merged entity will control in each airport in an effort to ensure the new entity does not control too much of the market. If it is deemed too much control may be exercised the authorities may okay the merger only on the condition that a certain number of those slots be sold to a competitor.

Now, think of a franchisee; someone who wants to acquire the rights to a Seven Eleven, for example. What is their Key Component? The trademark maybe? Wrong! The franchisee will get a license to use the trademark but so does every other franchisee. Sure, it is important but it is not the franchisee’s Key Component. The local/geographic market is what they will have effective control over making it their Key Component. It is for this reason that the franchise operator needs to pay close attention not sell the rights to too many franchisees in a given area for they risk limiting franchisee revenues which leads to unhappy franchisees and potentially less franchisees because their poor reputation.

A second attribute of the Key Component is time. A resource will lose its “power” over time either because of age, competition, or law. If you are the Key Component you may not be as effective when you are older than when you were younger. The same can be said about most organic resources, like land, which will lose nutrients the more it is farmed or disappear through erosion. Many machines only have a given useful life as they will become less performant through wear and tear. The law may also stipulate how long title is given on Key Components like intellectual property and contracts. Likewise, as you may have read in many articles, with the increasing rate of competition the useful life of many technological products becomes shorter and shorter. Software, for example, many have a long life by law – copyrights – but competition reduces it to anywhere from 18 to 36 months. In the best cases, you may reach 5 years before a new version needs to be launched.

The Key Component has many other uses in business which I don’t want to go into right now but do believe me when I state it covers everything from: asset to company valuation, mergers and acquisitions, pivoting, growth, cultural and belief systems, central bank interest rates, trade policies, labor relations, wars, and so on. Basically, the Key Component touches on all aspects of our daily life whether we know it, or not.

All I want you to takeaway from this article is this, (1) in order for a business to exist it must own and/or control a legally recognized resource, the Key Component, and (2) this resource is only useful for a certain period of time. Without understanding these two fundamental and important attributes of your business you can try all the process improvement gimmick out there and you will still be asking yourself, “What’s wrong with my business?”

If you are ready to take the next move then please contact my by messenger to schedule an exploratory call.

Is Your Marketing A Gamble?

How many times have you heard or participated in discussions about the effectiveness of marketing dollars? Personally, I can’t even begin to count. There have been so many. Undoubtedly there will be even more. However, when I ask people to describe the actions they want to undertake and the outcome they seek to achieve it often sounds more like gambling than business to me.

Businesses are organizations that take the uncertainty out of specific outcomes for their clients. Consequently, the processes and actions engaged in must take the uncertainty out of the business providing its goods and services to its customers. Marketing, as a process, is not an exception.

All too often, my own customers as well as some colleagues presents marketing plans which are so ambiguous that they seem to based on a hope and a prayer. In the worst case, they appear to be the power play of an individual or department seeking to push their own agenda to justify their existence. At the other end of the spectrum, many marketing actions seem to be motivated by something someone absorbed through the media; if worked for them it will work for us type reasoning. None of this works for me and I hope it doesn’t work for you either.

Although I can’t provide an answer that will satisfy every marketer, I would like to provide a framework for considering the marketing actions you plan to engage in: probabilities.

Do you know the odds of your marketing producing the desired outcome?

In my view, any marketing action must have a probability of outcome better than walking into a casino to play a game of craps. For those of you unfamiliar with the game it is played with 2 six sided dice, thus I figure you have a 1 in 36 chance of getting the result you want. Although this is not strictly mathematically correct it makes no difference to this argument. If you prefer, use a roulette wheel which has similar odds. My point being these odds are considered gambling. This is not business!

If the odds of achieving the objective are higher than gambling at a casino then you haven’t thought things through. To be more precise, your marketing is gambling, not business.

Before going to your boss, investors, or partner with a marketing action please, please, please, work through it so you have some idea what the odds are of success. If you don’t then you risk having another long discussion about the value of investing in marketing.

Before doing anything you and your team need to set out the goal. Whatever that goal may be ultimately it should turn into revenue. And revenue turns into gross margin and then profit. All too often I see marketing plans that cannibalize gross margin thereby never generating any profit. Don’t get caught up in circular reasoning.

Determining the odds requires testing and more testing. Holding the objective steady test the audience, the message, the connection between the two, and anything else which impacts the objective until you are no longer in the realm of gambling. The better your probability of success the easier it will be to have that budget granted.

Now, present your plan.

How Solving the Baby Boomer Problem Put Us in This Mess

Frankly, I don’t know about you but ever since I was young boy I tried my damnedest to understand the why things are the way they are in this world. After five decades, I have explained much of the world I live in to my satisfaction although not all.

When it comes to business it has always been very clear. Business people are property managers. I know. I know. It sounds reductive. Honestly, it is not. Businesses own and/or control certain key properties which are used in the products/services they make and sell to customers. And, customers seek to acquire those products/services because they take the struggle out of achieving a specific outcome. Depending on the legal framework of the jurisdiction the business operates in, the lion’s share of the value created through the process can go to the property owner, the customer, or the state (with the excuse it will be equitably redistributed). The decision about who gets what depends on the legitimacy the system gets from the community’s belief system. Its not much more complicated than this. And, I have successfully used this framework to conduct business on every continent.

But my challenge does not stop there. I also want to understand the world from a political point of view. Sure, the largest part of politics has to do with property and who and how it is used in business. However, there is – in my view – a higher level of politics that goes beyond the self-interest of one business segment, or industry, or the other to encompass the interests of the populous by which government maintains its legitimacy. This political sphere is much more interesting especially nowadays with this increasing talk of anti-establishment parties, political movements, and candidates.

For however much government and business are intertwined there is one fundamental difference: time. A business will operate within a generational timeline (25 years) or less because their property will become less competitive or even obsolete within that period. In other words, the business’s ability to make a return on that property will diminish over time to such a point that it can no longer cover the cost of capital let alone reinvest for the future. While government works on a timeline beyond the generation. Think of defense, for example. Is it in the interest of a government to invest in developing a new weapons system that is effective tomorrow or one that will be effective in a generation? A generation, of course.

Based on this understanding of the world, the governments of the most industrialized economies in the world saw the post World War II Baby Boomers are a fundamental threat to the legitimacy of the political system. A bigger threat than any other threat known at the time. Because of this perception, dealing with maintaining the well-being of Baby Boomers was deemed to be the cornerstone of most policymaking starting in the mid 20th century. Although each country followed different policies, I’d like to focus on the US and Europe because I know them best.

Although in the years after the WWII, certain inroads were made to deal with this threat to political legitimacy in Europe through the pursuit of “social” policies and in the US with creation of Social Security, it was not until the oil shocks of the 1970s that external threats amplified the internal threat. With the oil crises of the 1970s the manufacturing-based economies were deemed at risk. the US’s response came from the Reagan administration with what was called supply-side economics but which in reality was a concerted shift away from manufacturing to consumption. The UK followed suit under Thatcher but the rest of Europe was a mixed bag. Many countries wanted to partake in this brave new world but their status quo didn’t want to give up power, maintaining a strong manufacturing sector. For the US and the UK the shift to a consumption-based economy made perfect sense because as the population aged there would be less and less people to work in the factories which would have made the model and the government unsustainable. So these two dominant players were more than happy to start moving production offshore and investing in consumption. The first move offshore came in the 1980s with the rise of Japan Inc. and the creation of free trade zones, like NAFTA. As Japan’s economy matured, manufacturing went to South East Asia, in the 1990s, and then into China, at the start of the new century. Whereas, in the “West” first retailing became the big industry then finance, then the Internet. Interestingly, the Internet started out as the great leveler but was quickly highjacked by the consumption economy where it now resides.

Unfortunately, as with all well laid plans things don’t aways work out as planned. Once manufacturing was outsourced and free trade agreements were put in place wage growth stopped. Sure. As long as production and consumption are within your borders the rising time raises all boats. But when the contribution of an individual can be done in the economic center or the low cost periphery then competition dictates that it goes to the periphery. Likewise, with stagnant wages it is difficult or not impossible for asset prices to rise. The once proud notion of working and saving to buy a home, pay your kids’ education, and return comfortably was substituted by cheap loans that follow you to the grave.

But did it, does it, have to be this way? It does if you continue to work with an economic and political model that benefits the property owner. But in a consumption-based economy this – debt, debt, debt – is the result. And, if we go back to the Baby Boomer threat, the government has to maintain if not inflate those asset values in order to provide a soft landing for this ever larger segment of the population. So after the Financial Crisis of 2008 the Federal Reserve and the Treasury stepped in to put a stool under asset values. Today, this policy of asset support continues not only in the US but also in the EU and Japan with their negative rate policies. What is more desirable, paying a reserve back to maintain the corporate balance sheet or marking down those assets to reflect their real economic value? Having the reserve bank do it, of course.

So now that government has completely falsified the game by maintaining a system based on property but where citizens are asked to consume and cannot acquire property, and where policies artificially inflate asset prices for those who have assets but where those who don’t guarantee them, and where an education never gets paid off because wages are stagnant since the 1980s, and,…and,… we should not be surprised citizens perceive government as illegitimate. Yes, we can set the clock back to a time when everything was done within your borders but all that would do is oblige the government to increase taxes and redistribute to those who need help and are retired. On the surface, maybe a nice solution but in reality the US and Northern Europe would become like Southern Europe. And, I’m not referring to the weather and food! No, the only reasonable response to this quagmire is to allow asset values to deflate to levels economically sustainable based on income levels without needing to recur to enormous amounts of leverage before the biggest parts of the Baby Boomer generation retire.

Telecom towers

Don’t Grow Your Business by Going After Every Opportunity

You, like many business leaders, may be growing your business by going after any and every opportunity that comes your way but not seeing any results. Don’t do it. You will just exhaust yourself and everyone around you. Your business must have a clear value proposition which allows your clients to create demand for you. As demand grows, your business model must be simple enough that you can scale it to meet the growing demand. Now you will see the results you are looking for.

As some of you may know, one of the services we offer is portfolio management which requires us to apply the ROKC ™ Method to publicly traded stocks. In the last quarter of 2015, we generated a 10.81% annualized return for our clients. Not too shabby given the down trend in the market. How we achieved this result was by looking to invest in companies with a clear value proposition and a simple business model. The same advice we give our leadership coaching clients. Doh! So here is an example.

One of the sectors we invested in was wireless towers. If you aren’t curious about how your cell phone works you would never even know there are multi-billion dollar, publicly traded, companies that make the magic happen. In the US, aside from the wireless operators themselves (Verizon, AT&T, Sprint, T-Mobile USA) there are three major players: American Tower Company ($37B market cap. as at the close on 2/19/16), Crown Castle International ($27.5B), and SBA Communications ($11.3B). Reading their annual reports you learn they own and control the land on which they place their towers and they rent out space on their towers to wireless carriers (so you can get service). Music to our ears! Pure ROKC companies.

A business exists when it owns and/or controls a legally recognized property that is used in their products/services, which customers will seek to acquire if it provides them with a benefit.

These companies own and/or control the land: the key component without which nothing else is possible. The key component is used in their products/services: the product is the tower while the services involve the antennas. The benefit for the client (the wireless carriers) is lower costs than having their own.

But wait! Didn’t I write above that the wireless carriers have their own towers?!! Yes, I did. So why is there a benefit? Simple, in some locations the cell traffic may be limited so having a single antenna on a single tower would not be cost effective with respect to usage. Consequently, by saving on the cost of that tower by sharing it with competitors works in everyone’s favor.

In fact, when examining the annual reports, management tells the reader what the average number of antennas is per tower. For example, at the end of 2014, SBA Communications averaged 1.8 antennas per tower while Crown Castle International averaged 2.2. This 22% difference in revenue falls directly to profit because, for all intents and purposes, the cost of the tower is fixed. As you can see, notwithstanding the simple business model the difference between just getting by and being “successful” hinges on very little. In this case, lie any real estate company it is all about location, location, location!

That goes for you, too. Don’t grasp at any and every opportunity that comes your way. Have a simple business model with a clear value proposition and just keep doing that one thing over and over again as you scale because that, my friend, is already hard enough.

labyrinth of uncertainty

The Uncertainty Model: Understanding What Business You Are In

Over the last few weeks, I have been working on a presentation of the leadership model I use during my coaching sessions, but I have to admit that preparing presentations is not my forte. So I’m posting a rough outline here to stimulate thoughts and discussion. Please bear with me as I do my best to put into words what is now in slides.

 

Since everyone comes into with world in the same way, I think it is fair to start from the human condition. We are all born into a precarious state of life and death. Up until recent history, infant mortality was a challenge. Even today, infant mortality rates are monitored and published by governments and non-governmental agencies around the world. The same can be said for a significant number of other life-affirming statistics, such as education rates, graduation rate, access to healthcare, (un) employment rates, birth rates, life expectancy, to name just a few. Therefore, we can see that our whole life is a struggle to survive.

 

One of the most touted models for understanding our struggles is Maslow’s hierarchy of needs. In it, Maslow argues that at the bottom of the pyramid there are our basic or – as I call the – alimentary needs and as we move up the five levels we attain self-realization. However excellent Maslow’s model may be, I find it flat and hyperbolic. It doesn’t really allow us to fully understand the nuances and complexities that make us who we are. Also, in most countries today we can’t really talk about needs as much as wants and desires. For this reason I have developed another model based on “uncertainties” of outcome. After all, what is Maslow describing but our struggle to overcome uncertainty; moving from a state of “need” to one of “freedom” from that need. I unimaginatively refer to this framework as the “Uncertainty Model”.

 

The model is quite simple in its constitution, making it easy for anyone to understand yet challenging in its application because of all the questions it raises. The basic premise consists in recognizing that the human condition is a struggle on three principal axes: physical existence, emotional existence and intellectual existence. In fact, you can take any element in Maslow’s model and re-categorize it according to these three axes. For example, food is a need – there is no denying that – making it a physical uncertainty. However, once we move away from the physical it can be a source of emotional or intellectual uncertainty as well. Emotionally, we have “comfort food”, or a way of building community, or a source of distress (such as what occurs with eating disorders). Intellectually, food can be a challenge if unknown, a joy to discover, a tool to create with, or a science to measure. Depending on the individual their uncertainty may be very high – a need – in one or all of these three axes and medium or low in the others. Not in the absolute but on the basis of a perceived reality. Although a portion of the world still struggles to acquire food on a daily basis, even for them food has an emotional and intellectual component albeit not as significant as for the rest of the world.

 

By way of another example I offer another of Maslow’s needs: clothing. Here too we can analyze this uncertainty based on these three axes. A person’s emotional uncertainties may be satisfied through clothing either by giving expression to who they are by donning certain clothes, or by taking on a certain persona by wearing the same. In the former case, in Maslow’s interpretation the individual is satisfying self-realization needs. In the uncertainty model, the people who are from the basic need to cover their body from the elements can now express themselves through clothing. In the latter case, the person might be seen as addressing self-esteem issues or more emotionally or psychologically undesirable challenges. Many more examples may be required to illustrate the usefulness of this model but in the interest of brevity I will wrap things up quickly, but hope I have inspired you to test this model on your own time.

 

Two more examples to clarify and then we can move on. Picture a three dimensional graph that starts at 0% and goes to 100% – from freedom to struggle – and, where each axis corresponds to physical, emotional and intellectual uncertainty. Now imagine what a person who is near 100% on all three axes looks like? This person would fall into the “neediest” part the community. Next, imagine a person who is close 0% on all three axes. This person doesn’t need to struggle almost at all to satisfy the uncertainty of their physical, emotional and intellectual outcomes. They would be at peace with themselves and the world, or very “Zen”.

 

However, most of us are somewhere in the middle and struggle to one degree or another with one, two or three of these axes on a daily basis. To overcome these uncertainties we look to those members of our community who can help us struggle less.

 

It stands to reason that if someone is experiencing a high level of uncertainty with regard to a given outcome they will value the assistance of the person who can help them struggle less to overcome it. In the case of food, a person may value a hunter, a gatherer, a farmer, a butcher, a cook, a restaurant, a supermarket, or a brand. Whoever provides them access to food will be valuable to them. Similarly, a person uncertain about their ability to understand a certain subject may look to a teach, a tutor, a family member, a learning center, a school, or a writer. Someone who can reduce their uncertainty about understanding a subject. The same thing can be said for just about everything one experiences multiple times a day through different encounters. In some small way these people we look toward to reduce the uncertainty of outcomes for us free us from our daily struggles.

 

In the ROKC Method we define a leader as an individual who has developed a view of the world – however you want to define it – that allows them to perceive a less uncertain reality, who communicates this vision to their community, inspiring them to cooperate and collaborate to bring this reality/vision into fruition. From this point of view, anyone who helps another person reduce an uncertainty for them is a leader for those they have helped. On an individual basis, we allow many people to lead us on a daily basis without even thinking about it. The person driving the train or bus this morning was your leader in getting you to and from work today. The agent at the airline kiosk who led you through the user un-friendly computerized check-in process was the leader there. The person who made your lunch at the local restaurant or company cafeteria was also a leader for you today. All these people, in one way or another, reduced the uncertainty of an outcome for you and you willing collaborated and cooperated with them to make it happen.

 

When one of these individual leaders takes their specific uncertainty-reducing magic and makes it available to an ever-increasing number of people, we call that a business. As demand grows, that individual will have to hire and train others to help satisfy all the demand. As demand grows even further, those people will explain the processes to the engineers who will mechanize all or part of the processes necessary to reduce that specific uncertainty of outcome. And so on and so forth, scaling the business to reduce uncertainty for an ever-greater number of clients.

 

However, if that individual can come up with some way to reduce uncertainty then someone else can too; the competition. There are two types of competitors: more effective and more efficient. Once again, our struggle graph helps us to understand. A competitor who struggles less but achieves the same level of outcome is considered more efficient. While a competitor who struggles just as much but reduces uncertainty to a lower level is known as more effective. As you can imagine, through the process of competition economic actors – big and small – drive the level of uncertainty of outcomes toward zero thus freeing us from the struggle to survive.

 

Unfortunately, no matter how free we are, some of us will always be uncertain about something else. Once again, a good example to illustrate this point is food. In hunter gathers communities the level of uncertainty is high so when they start domesticating plants and animals people are freed up to engage in other activities. In other words, domestication brings down uncertainty. Through mechanization agriculture becomes more efficient allowing businesses to take over from small farmers. With chemistry, agriculture becomes more effective. But each step toward freedom comes with its challenges. With fewer people required to farm a migration takes place to towns and cities, which makes getting the food to market more uncertain than it was when everyone consumed what they produced. Transportation companies developed in response. At first, food was transported to small shops run by shopkeepers and these became supermarkets because it was more efficient. However, as the uncertainty of accessing food moved to zero, consumers started to become uncertain about the way the food was produced, spurring the organic movement. A new segment of the market was thus introduced. For some people this uncertainty went ever further, they wanted locally produced food, creating a further segmentation in the market. You get the idea. The closer you get to freedom from uncertainty of outcomes the more fragmented the market becomes because new uncertainties take primacy over the old ones and/or are created as a result of the solutions that are found.

 

As I hope you can see from the above, businesses exist because someone was able to come up with way of reducing a specific uncertainty of outcome for a specific part of a community on a large scale and the members of that community value the freedom the product(s) give them.

 

Once this is well understood, it is then only a question of political, economic, cultural and societal specifications and biases that determine which stakeholder gets what portion of the value created by reducing this uncertainty.

 

The work I do with business leaders focuses heavily on helping them to clearly identify and communicate the uncertainty they are reducing and for whom. The uncertainty model gives them a framework to better understand their business’s market position as well as that of their competitors thereby significantly influencing decision-making. Lastly, by understanding the specific parameters in which the business exists they can maximize stakeholder satisfaction.

 

Give it try. You’ll like it. The Uncertainty Model.

 

Consortium

How To Split Equity In Your Startup?

It seems like not a day goes by without someone posting somewhere on the Internet a question asking how to split the equity in their startup between a founder and co-founders, then with employees, next with investors, and so on through each round funding. Splitting up the shares in a company requires first and foremost attributing a value to the company. Not an easy task at any point in time. However, even more so, when you are just starting out.

Not long ago, I posted an answer to just such a question based on the ROKC ™ Method which was quickly picked up by Mr. Randall Reade, a Board member of Washington DC Tech Fund, Executive VP of Washington DC ArchAngels, and President of Global Tech Exchange, we found our point so enlightening that he asked us to diffuse it as widely as possible.

“Yes, I like that idea! You should spread it around more. And you are correct — it can be difficult to determine a valuation, especially when there is no revenue. Most startups just assume a $1M valuation, and it’s at least a yardstick to go by. But you are correct — many times there is no value.”*

Well Randall, here you are.

The ROKC ™ Method states, a business exists because it owns and/or controls an asset – which we refer to as the “Key Component” – that is used their products/services which customers will seek to acquire because it gives them a competitive advantage in achieving a specific outcome. Therefore, a company valuation can be broken down into elements: the value of the Key Component, and the value of the economic activity that generates the Return On Key Component, or ROKC. Likewise, the Method states that a business will continue to exist as long as the ROKC is higher than the Cost of Capital. Consequently, when valuing a business at the idea stage the business owner has neither the Key Component nor the economic activity making it impossible to attribute a value. Similarly, most early stage businesses may have only the Key Component but not an economic activity making it equally challenging to determine a value. This is why we recommend using a more non-traditional approach: the consortium, otherwise known as a contractual Joint Venture.

A consortium is basically a contract between parties – individuals or legal entities – who come together to achieve a specific goal, which can be work on a common project or jointly provide a service, by way of example. The contract details how the parties will work together and divide up the benefits. It is not a legal entity so it does not have any of the administrative burdens required by law. The consortium is ideal for early stage companies because it is light and creates the conditions for focusing on building the business instead of bureaucracy.

Let’s look at the example of an idea stage business before increasing the complexity. At the idea stage, there is no manifestation of the business yet, there is on Key Component or economic activity. At this stage, there is nothing to bring to a legal entity or a need to limit liabilities so why go through the hassles of creating and administering one. Even to give the idea expression there is no need for a legal entity.

For the first iteration, the “idea person” will a small team to build a prototype. Until the prototype is built there is not Key Component to place in a legal entity making this phase ideal for a consortium since there are two or more parties collaborating. It is at this stage that a contact between the parties forming the consortium can be drafted detailing each party’s role and expectations going forward. To keep things simple, we suggest each party define an hourly market comparable rate for their work and keep track of the time they spend working on the prototype. At the end of each month – or any period agreed upon – each member of the consortium validates the others so there are no conflicts at the end.

Assuming the prototype is determined to be of equal value, when forming a legal entity, each party receives an equity stake equal to the number of hours employed multiplied by their hourly rate, or can be bought out by one or more of the other members. If the prototype is given a value inferior to the time spent times the rate then a percentage based allocation is made. And, if the prototype is worth more the remainder can saved for future employees, advisors or new equity partners.

In the next phase, the prototype may actually be put to work allowing the founding team to determine the business’s market fit. This phase can require a whole series of pivots and adjustments which means more time and resources dedicated possibly by new parties. Once again, the contract can be adjusted to take into consideration each new party and their expectations allowing the work to continue before creating a legal entity.

“The consortium approach has the added value of seeing what you have and can do BEFORE the expense and trouble of founding a company. Focus on the product first, and the determine whether this product and the team can generate revenue. If the answer is no, then why waste all that time and money? If yes, then you can always put it together.”*

As long as the parties to the consortium do not require a limit to their liabilities beyond what they already have entering the economic phase should not be a problem.

So when you launch your next startup, please consider the value of creating a consortium between those who will be collaborating and cooperating with you instead of how to divide a pie which is worth nothing.

 

*Quotes are Randall Reade.

Pain Relief

Competitive Advantage

Almost every day, somewhere in the world, for the last few decades, people have been discussing “competitive advantage” specifically with regard to the business itself. More recently, certain scholars have even gone so far as to suggest a business’s competitive advantage is transient or even non-existent. However, at ROKC we place competitive advantage front and center – in the customer’s lap! Simply put, businesses exist to provide their customers with a competitive advantage in achieving some specific outcome.

Let’s consider the Customer Competitive Advantage for a moment before getting into the concrete example of Over The Counter pain relief medication.

I don’t think anyone would contest the assertion that since the dawn of time man has struggled to survive. First and foremost, physiological survival. Up until fairly recently the rate of infant mortality, death at childbirth or within the first year of birth, was very high. Modern science, medicine and hygiene greatly increased the chances of an infant surviving anywhere in the world. Some have argued that infant mortality rates in the “developed” and “developing” worlds are so close it makes no sense to even use these words. The second struggle is to survive physiologically past that first year by having enough food, clean water, and access to medicine to keep your body healthy over the rest of your life time. Here again, many nations have overcome this struggle through bountiful access to these resources. While other nations are still struggling to bring these basics to their citizens. In almost all cases, both of these struggles have been overcome through science and the technological advances employed to make these resources readily available on a mass scale making the struggle for education the third most prevalent in life. These three struggles have contributed significantly to our “modern” way of life and business: science informs our understanding of what resources can be used while technology gives us the means to make them usable on a large scale so that we can alleviate the struggles of as many people as possible. Therefore, business serves only one purpose which is to provide customers with a competitive advantage in overcoming their struggle to survive.

Philosophically, ethically, morally, economically, politically,….we can engage in countless debates as to who gets what benefit from this process of transformation but we will not do so here as it is outside the scope of this article. However, it is a passionate subject which has been debated for centuries and forms the very basis the political and economic systems used in every country.

In more customer-centric economies where consumption is the highest proportion of the Gross Domestic Product it is probably easier to see how business’s provide customers with a competitive advantage in achieving a specific outcome if not for any other reason that the market is so crowded. More times than I care to admit I use the pain relief align at the local pharmacy to illustrate this point. Thus, the reason for this article. So, here goes!

Way back in history when you struggled with a headache you would have to romp around the forest and plains to collect herbs you then boiled up in a pot and drank – probably a very bitter – tea in the hope of some pain relief. The process probably took a great deal of time which meant people just suffered through it. The herbalist and then apothecary came along warehousing the herbs allowing you to gain some time but it was still rather inefficient. Subsequently, science came along to determine what, inside, the herb was the active ingredient that relieved a person’s pain allowing the pharmacist to synthesize it and keep a powder on hand for any customers who came into their shop with a headache. Technology helped standardize the process and mass production made it so cheap to manufacture little pills that you could keep a bottle at home, in the office, on your person, in car glove compartment,… Over the course of time relieving a headache went from a few hours to minutes. Or, to express it differently, the competitive advantage by which the customer relieved their headache increased significantly; it became not only faster but more sure with time, the uncertainty was reduced to almost zero.

However, in today’s modern pharmacy you don’t find just one product but hundreds. Why is this so? Well, at a minimum, you have four: Aspirin (Salicylic Acid), Acetaminophen, Ibuprofen, and Naproxen. These are the four most commonly used “active ingredients” in Over The Counter pain relief products. But what about the rest? The other hundreds of products are made up of variations of these four themes each one addressing another customer uncertainty by providing a competitive advantage to relieve the customer faced with that specific struggle.

  • Heart health
  • Children, Women, and Men targeted
  • Fast acting
  • Coated pills for stomach discomfort
  • Migraines
  • With/without water
  • Cold/fever/flu
  • Indigestion
  • Arthritis
  • Allergies
  • Chewable
  • Flavored
  • Brands
  • and so on and so forth, not to mention dose sizes and quantities.

In fact, a search of Walgreen’s e-commerce site shows no less than 79 Aspirin containing products, 278 Acetaminophen products, 112 Ibuprofen, and 40 Naproxen. 509 pain relief products that use these 4 active ingredients! From a ROKC™  Methodology point of view, each of these 4 key components has on average 127 products providing customer’s with a competitive advantage in treating a couple of dozen or so uncertainties. But this is only part of the reality because this is only the Over The Counter mass retailer market. These same pain relievers are available in convenience store, gas stations, vending machines,hospitals, medical offices, dental offices, veterinary offices, … all over the world. Next, you have to add the prescription products into the mix and maybe we have a complete picture.

In fact, in the US, all health products are registered with the FDA. A query of the FDA database using these active ingredients gives a complete picture for this country:

  • 1,393 – Aspirin
  • 8,090 – Acetaminophen
  • 2,899 – Ibuprofen
  • 1,365 – Naproxen

Or, 13,747 pain relievers using these 4 active ingredients!

In such a crowded market it is impossible to successfully penetrate a market with a new product by only taking into consideration the active ingredient, or as we call it the Key Component. And, please keep in mind, those ancient herbal remedies are still around vying for their share of the market as well as new compounds challenging the entrenched 4 to dethrone one or all of them.

So regardless of where your business is in its life cycle – startup or mega-corporation – you are going to be hard pressed to make any headway in a market if you do not approach it based on the competitive advantage you are providing to the customer.

While researching with topic we came across a newer company with a novel approach which illustrates this point. All of the pills, capsules, gelcap, tablets,… we looked at require the consumer to drink a full glass of water. Goody’s on the other hand provides a powdered product the consumer simply ingests, no water. Undoubtedly this is a very niche product however each does retails for $0.73 while basic aspirin is less than a penny. That’s over 73 times more expensive! Their margins must be very comfortable. Goody’s was able to discern an opportunity in the marketplace that no one wanted to – or could – address making it a viable new entrant into a very crowded market.

What Customer Competitive Advantage is your business addressing?

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